For instance, if you run into large medical bills or a costly home repair, you may not have the money to pay for it. Beyond that, being house-rich and cash-poor can lead to a downturn in your quality of life.
“You’re working constantly to hold onto the asset and not really enjoying the benefits of homeownership,” says Vosburgh.
How common is it to be house-rich and cash-poor?
These days, it’s a bit of a mixed bag: Thanks to a healthy economy, low unemployment, and stricter lending requirements put in place after 2008, many homeowners are house-rich, meaning they have good equity in their home. Yet many of these same homeowners are also cash-poor, lacking the reserves necessary to see them through life’s ups and downs.
“First-time buyers are saving up lots of money for the down payment—usually between 5% to 20%,” says Cedric Stewart, a residential and commercial sales consultant at Keller Williams in the Washington, DC, area. “But they often don’t leave any money for the ‘what if’ fund, such as emergency home maintenance.”
Another group vulnerable to becoming house-rich and cash-poor are buyers looking to trade up their current home.
“These buyers take the money from the sale of their current home and plunk it all down on the next one,” explains Stewart. That’s a risky move, he says, since it leaves you no financial wiggle room for whatever financial curveballs may come your way.
The bottom line: A buyer should never leave themselves cash-poor, says Ralph DiBugnara, vice president at Residential Home Funding.
“If it’s going to cost you every bit of savings just to acquire the house, you may not be ready for that specific home,” he says.
How you can avoid it
Deeply understand your finances before you buy a home, recommends Goldfeld. For starters, try entering your income and debts into a mortgage calculator to figure out what price you can afford on a home. Speak to a lender to find out how large a home loan you qualify for, too.
These moves will help you figure out what your monthly expenses would be if you had to pay for that mortgage. Take note: Even if you qualify for a large mortgage, you don’t want to get yourself into a position where every little expense is difficult to pay for.
So make sure you have at least a year of whatever your recurring monthly payments would be in reserve and shoot for a debt-to-income ratio under 30%. Then set a reasonable budget for the purchase price of a home. Look for a healthy balance between investing in a new home and creating your ideal quality of life after the home is bought. (It’s plain common sense to hold enough cash back to have a financial cushion in case of an emergency.)
Another option is to get a home warranty to cover any unexpected home expenses.
“I tell all my buyers to ask for one from the seller or pay for it themselves,” says Vosburgh.
Original Source: https://www.realtor.com/advice/finance/house-rich-cash-poor-meaning/
Original Date: Oct 12 2018